Unemployment is likely to peak at close to three million in the UK as the economic outlook worsens, business leaders warn.

The Confederation of British Industry (CBI) said the financial turmoil and dramatic decline in business activity over the last two months have increased the likelihood of a “deeper and longer-lasting” recession than had been forecast.

GDP growth for 2009 has been revised down from 0.3 per cent growth to shrink by 1.7 per cent, while unemployment will rise to around 2.9 million, the CBI predicts.

This would be the sharpest fall in GDP since 1991.

The economy is expected to contract quarter-on-quarter by 0.8 per cent between October and December this year, and to shrink again for a subsequent three quarters before beginning a slow recovery through 2010.

Inflation is now predicted to fall sharply from 4.2 per cent this quarter to 1.7 per cent by the end of 2009, undershooting the Bank of England’s two per cent target.

By 2010, inflation may head as low as 1.1 per cent, averaging out at just 1.2 per cent over the year.

John Cridland, CBI deputy director-general, said: “What is clear is that the short and shallow recession we had hoped for a matter of months ago is now likely to be deeper and longer lasting.

“An unwelcome consequence of the downturn will be a significant loss of jobs, many of them in sectors that have been relatively insulated until now.”

The jobless rate is expected to rise from its current levels of 5.8 per cent to nine per cent by mid-2010. Last week, the British Chambers of Commerce (BCC) warned unemployment levels may top ten per cent, leaving 3.25 million out of work.